Tuesday, August 2, 2011

Post Debt Agreement Crash?

The debt agreement is now history but so far this is shaping up to be another terrible week for the stock market.The Standard & Poor's 500 lost 2.6 percent Tuesday as investors grew increasingly concerned about the economy. The benchmark index is now at its lowest point of the year, erasing all of the year's gains in the stock market.

Before the market opened today, I sent out this message to my distribution list:

The Senate should rubber stamp the debt deal. I think they will sell the news, the stock market will tank, but it will recover tomorrow and rest of week (maybe even this afternoon). Friday's US payrolls will be weak but that dip will be bought too. Importantly, even though economic data will come in weaker-than-expected, keep buying the dips on risk assets.

A Montreal hedge fund manager responded by reminding me that I have nothing to gain by making market calls and can only lose. He's right, it was very ugly on Tuesday as traders took their marching orders and took RISK OFF. By day's end, pretty much the only thing green on my screen were the Ultra Short Proshares (click on image to enlarge):

Actually, Ultra Short Proshares weren't the only thing moving up. I also noticed a few stocks here and there that made big moves up. Stocks like Radian Group Inc. (RDN), the second-largest U.S. mortgage insurer, soared 15% on Tuesday after the company swung to a profit on derivative gains and said there was a drop in delinquencies on home loans (note Fidelity and Wellington are top holders).

But generally speaking the mood is dismal out there. I took the day off, went to meet another excellent physiotherapist who was highly recommended to me. She is incredible and to my surprise, she admitted to me that she too has MS. She is also very open about it just like me. And like me, she takes no medication whatsoever, watches her diet, exercises, and has a positive attitude. Actually, she has a better attitude than me and told me the minute she got diagnosed she said "Ok, MS, next"). We talked about how people have the wrong attitude when they hear you have MS. They generally pity you and say stupid things like "I am sorry to hear that" or "poor you."

Poor us? Why? Because we have MS? Hah! You should see this lady work. Unlike most people in finance, she works her tail off. She took a full hour with me, evaluating every part of my body. She's strong and was telling me "push harder" as she tried to evaluate my strength. This lady is truly amazing, not because she has MS, but because she is really good at what she does. She made a program for me that consisted of balancing on a platform, on one leg, breathing exercises (through the stomach), and lying on my left side in a fetal position and opening up my legs to work a specific right glut muscle which needs work. I was very impressed and can't wait to see her again. She inspires me.

I then went downtown to hook up with one of my favorite strategists at Nespresso on Crescent street. It was a beautiful, sunny day but he was dressed in a suit so we sat in the shade. He was happy that he made the right call on stocks and sees all the leading indicators, including the ISM, rolling over. "All the other strategists called this a soft patch but that's because they still use old econometric models." He added: "This has nothing to do with the debt ceiling crisis. The US economy is slowing and so is the rest of the world. Just look at the Korean and Australian stock indices."

I told him that the US economy is in for a long, tough slug which could last decades and these are perfect trading markets. He agreed. We also spoke about the characters in finance and I shared something with him that my psychologist told me. She told me:"Leo, you'll never be happy working in this industry because you're looking out for the little guy but the industry is full of sociopaths looking to screw the little guy over." And she added: "Remember what I told you, acceptance is freedom from hell. Unless you're willing to accept that this is an industry of sociopaths, and that you won't change them, then you'll always be miserable working in finance."

This is true, which is why I prefer doing my own thing, blogging and trading. But there are plenty of good people in finance too. Case in point, the person I met up with today. He's smart, ethical, extremely successful, made it outside Quebec, and has nothing to prove to anyone but himself. He could have easily become an arrogant, insufferable, narcissistic prick like so many people in finance who achieve "success," but he has his two feet firmly planted on the ground and values the important things in life, namely, his family, friends and health. I just received a copy of his book, which he co-authored with another first-rate person, and I'm already reading it and will review it on my blog (need to review a few books).

Some concluding thoughts. Economic data will continue coming in weaker than expected and the stock market will gyrate wildly (don't get too cute shorting this market). This Friday, we're going to get the latest jobs report and see if the US economy is creating any meaningful job growth (don't hold your breath). The jobs crisis remains the single most important issue that policymakers have yet to adequately address.

Below, I leave you with a couple of must watch interviews. One with Martin Feldstein, an economics professor at Harvard University, who talked with Bloomberg's Tom Keene about the risk of the U.S. economy slipping into a recession. And the other is CNN's Wolf Blitzer interviewing the independent senator from Vermont, Bernie Sanders. Mr. Sanders reminds us that millions are struggling to get by in this economy and couldn't care less about the stock market (unfortunately CNN posted an edited version online; it is worth watching the full interview posted on YouTube).

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